Professional Development Unit

PMP Exam Prep Course

Session (17-18)

Project Cost Management

1.Overview

2. Plan Cost Management

3. Estimate Costs

4. Determine Budget

5. Control Costs
 Discussion Question
Discussion Question

What activities are involved in managing costs

of a project?
• Project Cost Management includes the processes involved in planning, estimating,
budgeting, financing, funding, managing, and controlling costs so that the project
can be completed within the approved budget

• On some projects, especially those of smaller scope, cost estimating and cost
budgeting are tightly linked and can be viewed as a single process that can be
performed by a single person over a relatively short period of time
 Question

Can you guess what activities should be done

Question

when you manage cost of your project?

• Processes
Plan Cost Determine budget
Management 2
1 Estimate Costs 3 4
Control Costs
 Cost Management Terms
• Opportunity Cost: the loss of other alternatives when one alternative is chosen. For example;
Cost Management Terms

when you have to select between two projects of A=$50,000 and B=$70,000, the opportunity
cost of selecting project B is $50,000.

• Cost Benefit Ratio: This is the amount of money a project is going to make versus how much it
will cost to build it. Generally, if the benefit is higher than the cost, the project is a good
investment.

• Net Present Value (NPV): This is the actual value at a given time of the project minus all of the
costs associated with it. This includes the time it takes to build it as well as labor and materials.
People calculate this number to see if it’s worth doing a project.
 Cost Management Terms
Internal Rate of Return:
Cost Management Terms

• This is the amount of money the project will return to the company that is funding it. It’s how
much money a project is making the company. It’s usually expressed as a percentage of the
funding that has been allocated to it.

Depreciation:
• This is the rate at which your project loses value over time. So, if you are building a project that
will only be marketable at a high price for a short period of time, the product loses value as time
goes on.
 Exercise

Differentiate Between Cost Mgmt. Terms

Exercise
Plan Cost Management is …

• … the process of defining how the project costs will be estimated, budgeted, managed,
monitored, and controlled.

• It answers the question "how are we going to manage costs during the project“?

• It expands the summary budget from the project charter.

• The Triple Constraints (Scope, Time and Costs) are central for Cost Management.
 Plan Schedule Management
Plan Schedule Management

Can you describe

the process of planning cost management?

• What do we need?
• Which tools to use?
• What will be the outcome?
 Inputs Tools & Techniques Output
1. Project Charter 1. Expert Judgement 1. Cost Management Plan
2. Project Management Plan 2. Data Analysis
• Schedule Management Plan 3. Meetings
• Risk Management Plan
3. Enterprise environmental factor
4. Organizational Process Assets
 Activity

Describe Cost Management Elements

Activity
Estimate Costs is …

• … is a quantitative assessment of the likely costs for resources required to complete the activity

• … a prediction that is based on the information known at a given point in time incl. the identification
and consideration of costing alternatives to initiate and complete the project

• … expressed in units of some currency (i.e., dollars, euros, yen, etc.), although in some instances other
units of measure, such as staff hours or staff days, are used to facilitate comparisons by eliminating
the effects of currency fluctuations.
 Estimate Cost

Can you describe

Estimate Cost

the process of estimating costs in a project?

• What do we need?
• Which tools to use?
• What will be the outcome?
 Inputs
1. Project Management Plan
• Schedule Management Plan
• Quality Management Plan
• Scope baseline
2. Project documents
• Lesson learned register
• Resource Requirements
• Risk register
3. Enterprise environmental factors
4. Organizational Process Assets
Tools & Techniques Output
1. Expert Judgement 1. Cost estimates
2. Analogous estimating 2. Basis of estimates
3. Parametric estimating 3. Project Document updates
4. Bottom-up estimating • Assumption log
5. Three-point estimating • Lessons learned register
6. Data Analysis • Risk register
• Alternative Analysis
• Reserve Analysis
• Cost of quality
7. Project Management information
system
8. Decision making
• Voting
 Exercise

Identify Cost Estimation

Exercise

Techniques
 Exercise

Can you accurately estimate

Exercise

the project costs in the beginning?

• Rough Order of Magnitude (ROM) Estimate
• Usually made during initiation (-25% to + 75%)

• Budget Estimates
• Usually made during planning (-10% to + 25%)

• Definitive Estimate
• Identified when rolling up the WBS (-5% to + 10%)

• Need to engage team members using group decision making techniques to

improve accuracy of estimates
 Activity

Describe Activity Cost

Activity

Estimate Sheet
Determine Budget is …

• … the process of aggregating the estimated costs of individual activities or work

packages to establish an authorized cost baseline

• A project budget includes all the funds authorized to execute the project. The cost
baseline is the approved version of the time-phased project budget that includes
contingency reserves, but excludes management reserves
 Determine Budget
Determine Budget

Can you describe

the process of determining budget in a project?

• What do we need?
• Which tools to use?
• What will be the outcome?
 Inputs Tools & Techniques Output
1. Project Management Plan 1. Expert Judgement 1. Cost baseline
• Cost Management plan 2. Cost aggregation 2. Project funding requirements
• Resource Management plan 3. Data Analysis 3. Project Document updates
• Scope baseline • Reserve Analysis • Cost estimates
2. Project documents 4. Historical Information review • Project schedule
• Basis of estimates 5. Funding limit reconciliation • Risk register
• Cost estimates 6. Financing
• Project Schedule
• Risk register
3. Business documents
• Business case
• Benefit Management plan
4. Agreements.
5. Enterprise environmental factors
6. Organizational Process Assets
 Cost Baseline, Expenditures, and
Funding Requirements

Project Budget Components

 Total Project Budget $ 2500

Management Reserve - $ 300 $ 2500

Cost Performance Baselines $ 2200

Contingency Reserves - $ 250 $ 2200

Project Estimate $ 1950

Control account estimate $ 950

$ 450 $ 400 Other Work package

Work Package Estimate
$ 1000

Act 1. Act 2. Act 3. Act 4. Act 5.

Activity Estimate $ 100 $ 150 $ 200 $ 100 $ 300
Cost Baseline
Cost Control is …

• … the process of monitoring the status of the project to update the project
costs and managing changes to the cost baseline

• ... supported by the Earned Value Methodology

 Control Schedule
Control Schedule

Can you describe

the process of determining budget in a project?

• What do we need?
• Which tools to use?
• What will be the outcome?
 Inputs Tools & Techniques Output

1. Project Management Plan 1. Expert Judgement 1. Work performance information

• Cost Management plan 2. Data Analysis 2. Cost forecasts
• Cost baseline • Earned value analysis 3. Change requests
• Performance Measurement baseline • Variance analysis 4. Project management plan updates
2. Project documents • Trend analysis • Cost management plan
• • Reserve Analysis
Lessons learned register • Cost baseline
3. To-complete performance index • Performance measurement baseline
4. Project Management Information system
3. Project funding requirements 5. Project Document updates
4. Work Performance data • Assumption log
5. Organizational Process Assets • Basis of estimates
• Cost estimates
• Lesson learned register
• Risk register
 Exercise

How to control the cost and

Exercise

schedule in a project?
Key Terms
• Budget at completion (BAC): The BAC represents the total cost MTN launches project to upgrade
baseline for the project. E.g. 1,400,000. computer & customer information
system at 10 regional call centers.
• Planned Value (PV): Approved value of work to be completed in
given time. In another words Combined PV = BAC. At any point The upgrade takes 2 weeks per
in the project; Planned Value = BAC X planned % complete call centers and 20 weeks for all
Find PV from the example the work with a total combined
budget of of $1,400,000. You’ve
• Earned Value (EV): Value of work that has been performed and just finished week 12 of the
can be measured at any time. Earned value = BAC X Actual % project.
complete

At month 12 we received the data that 5 out of 10 call centers are

completed. Which means, we used 60% scheduled for 50% work.
Calculate BAC, PV, and EV for the example.
 Exercise
Exercise

Finding BAC and PV

Key Terms
MTN launches project to upgrade
• Actual Cost (AC): Total cost incurred for the work performed. computer & customer information
Account manager reports a cost of $ 760,000 system at 10 regional call centers.

Let us compute 2 variances and 2 Indexes The upgrade takes 2 weeks per
call centers and 20 weeks for all
• Schedule Variance (SV) is indication of schedule performance the work with a total combined
and is expressed SV = EV – PV budget of of $1,400,000. You’ve
just finished week 12 of the
• - variance indicates work behind schedule
project.
• + variance indicates work ahead of schedule
• 0 Indicates work on schedule – exactly on plan
Key Terms
MTN launches project to upgrade
• Cost Variance (SV) is indication of cost performance and is computer & customer information
expressed CV = EV – AC system at 10 regional call centers.

The upgrade takes 2 weeks per

• - variance indicates over budget
call centers and 20 weeks for all
• + variance indicates under budget
the work with a total combined
• 0 Indicates no variance - budget exactly on plan
budget of of $1,400,000. You’ve
just finished week 12 of the
project.

At month 12 we received the data that 5 out of 10 call centers are

completed. Which means, we used 60% scheduled for 50% work.
Calculate BAC, PV, EV, AC, SV, and CV for the example.
Key Terms : Indexes - Percentage
MTN launches project to upgrade
• Schedule Performance Index (SPI) – measure of work performed, computer & customer information
Expressed as SPI = EV/PV system at 10 regional call centers.
Using example SPI results 83.3%, - schedule control
SPI < 1 means we are behind the schedule The upgrade takes 2 weeks per
SPI > 1 means we are ahead of the schedule call centers and 20 weeks for all
SPI of 1 means we are on schedule. the work with a total combined
budget of $1,400,000. You’ve just
• Cost Performance Index (CPI) – measure of spending efficiency, finished week 12 of the project.
Expressed as CPI = EV/AC
Using example CPI results 92.1%, - Cost control EV= 700,000
CPI < 1 mean we are over budget PV= 840,000
CPI > 1 means we are under budget AC= 760,000
CPI of 1 means we are on budget.
 Exercise
Exercise

Earned Value Analysis

Key Terms : Forecasting
MTN launches project to upgrade
• Estimate at completion - forecasted cost of the project computer & customer information
(Revised), as the project progresses. Calculating estimate at system at 10 regional call centers.
completion
The upgrade takes 2 weeks per
o EAC= AC + Bottom up estimate to complete (ETC): The project call centers and 20 weeks for all
team reviews the work/ costs that’s been completed to date. It the work with a total combined
then estimates the costs to complete the remaining work. budget of $1,400,000. You’ve just
(Mostly happens when cost estimations are flawed) – Most finished week 12 of the project.
common method
EV= 700,000
o EAC= AC + (BAC-EV) – Assumption if the existing variance was
unique event and rest of project goes accordingly to the plan.
PV= 840,000
Calculate as per the given example. AC= 760,000
Doesn’t assume project will be on time.
Key Terms : Forecasting
MTN launches project to upgrade
computer & customer information
• Estimate at completion - forecasted cost of the project system at 10 regional call centers.
(Revised), as the project progresses. Calculating
estimate at completion The upgrade takes 2 weeks per
call centers and 20 weeks for all
o EAC= BAC/ CPI: When future work will be completed at the the work with a total combined
current rate. budget of $1,400,000. You’ve just
finished week 12 of the project.
*Calculate as per the given example.
EV= 700,000
PV= 840,000
AC= 760,000
Key Terms : To complete performance index (TCPI)
MTN launches project to upgrade
computer & customer information
• TCPI- Remaining work to be completed within the system at 10 regional call centers.
remaining budget. TCPI= Remaining work/ Remaining
budget OR The upgrade takes 2 weeks per
call centers and 20 weeks for all
TCPI= (BAC – EV) / (BAC – AC)
the work with a total combined
TCPI Variation= (BAC – EV) / (EAC – AC) budget of $1,400,000. You’ve just
Shows performance need to achieve the budgeted finished week 12 of the project.
results.
o TCPI > 1 means team must perform better. EV= 700,000
o TCPI < 1 means team is doing well. PV= 840,000
AC= 760,000
• Variance at completion (VAC): Represents budget shortfall or
surplus, expressed as VAC= BAC-EAC
Terms Definition Other Comments
BAC The total budget for the project
PV What your schedules says you should have spent BAC X planned% completed =PV
AC How much you have actually spent so far
EV How much of project value you have really earned BAC X Actual % completed =EV
SV How much behind or ahead in schedule we are SV=O On schedule, SV>0 ahead of schedule, SV<0
behind schedule
CV How much over or under budget you are CV=O On budget, CV>0 under budget , CV<0 over
budget
SPI Measure of schedule Efficiency (whether behind or head SPI=1 on schedule, SPI>1 ahead of schedule, SPI<1
of schedule) Behind Schedule
CPI Measure of cost efficiency of budgeted resources CPI=1 on budget, CPI>1= under budget, CPI<1 over
(Whether you are within budget or not budget
 Exercise
Exercise

Cost Forecasts